Result Focus. Pioneer Credit (PNC) Monday, 27 February 2017

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1 Result Focus Pioneer Credit (PNC) Monday, 27 February $2.25 $2.71 $1.94 Share Price $3.02 Positive Neutral Negative Trading Data Last Price $ month range $ $2.09 Market Cap $101m Free Float $63m (62%) 12 month return (historical) 18.9% KEY OBSERVATIONS 1H17 NPAT of $4.2m increased 27% on pcp, driven by the growth in PNC s Purchased Debt Portfolio (PDP), which increased 33% on the prior period. Cash collections (gross revenue) increased 8% vs pcp, to $30.8m. The Group s 1H17 CIV expense rate (change in value charge/gross revenue) was 22.5%, which is broadly consistent with the FY16 experience at 21.7%. As a result of the Group s cautious approach which includes a 9% risk adjustment for future liquidations, PNC s CIV charge has traditionally incorporated an upwards fair value adjustment. This is likely to remain the case in future years, provided macro conditions remain steady over the liquidation profile. For 1H17, the net gain on PDPs was $23.8m (21% of opening PDP value) vs 1H16 at $20.9m (26% of opening PDP value). Importantly, the fair value adjustment has had a less material influence on the portfolio s carrying value in 1H17 compared to the previous corresponding period. PDP purchases were $23.8m, with Company increasing FY17 purchasing guidance to at least $53m (+26% on pcp) from at least $50m. We note, FY17 purchasing guidance is contracted in full. With the higher level of purchases gearing has increased to 53% (48% 1H16), which is above Company s targeted <50% but below LVR covenants of 55%. NPAT guidance has been maintained for at least A$10.5m in NPAT. EARNINGS AND VALUATION IMPACT Our FY17 FY19 EPS estimates change immaterially <-1%. With increases in relative multiples and the passage of time, our valuation increases 2% to $2.35. OUR THINKING PNC has a strong growth trajectory, a product of the Group s relatively smaller size. Unlike many of its competitor base, PNC can afford to be selective and disciplined with regard to purchases. This is reflected in the Group s weighted average purchase price since inception to FY16 of 15.2c for every $1.00 of face value, which we understand to be at lower end of the purchasing spectrum. In addition, PNC s portfolio is weighted to financial services debt originating from the major banks. Given PNC s higher quality portfolio we remain comfortable with our Positive rating. Earnings Forecasts Yr to June 14A 15A 16A 17E 18E 19E EBITDA ($m) Rep NPAT ($m) Adj NPAT ($m) EPS ( ) EPS Gth (%) NM PER (x) DPS ( ) Yield (%) Franking (%) 100% 100% 100% 100% 100% 100% ROE (%) 2% 14% 15% 15% 18% 18% EV/EBITDA (x) Net Debt/EBITDA (x) Int. Cover (x) (2.8) (8.1) (6.8) (5.6) (4.7) (4.3) Valuation (blended) $2.35 Source: EAP Research Rushil Paiva rpaiva@eandp.com.au PAGE 1 OF 5

2 EARNINGS AND VALUATION EAP s EPS forecasts change immaterially over the forecast period <-1%. This is the product of a changes in net revenue assumptions which are offset by a lower cost profile that we have originally anticipated. With increases in relative multiples since last publication, our valuation increases to $2.35 from $2.30. EARNINGS REVISIONS Metric Customer Payments ($m) EBIT ($m) EPS pre Amort'n ( ) DPS ( ) Yr to June Old New % Chg Old New % Chg Old New % Chg Old New % Chg 2017E (1%) (0%) (0.2%) % 2018E % % (0.6%) % 2019E (0%) % (1.0%) % Blended Valuation $2.30 $2.35 2% Source: Company data, Evans & Partners Research estimates KEY ISSUES: THE CIV EXPENSE RATE AND ROOM TO GROW The business of purchased debt portfolios involves the recovery of outstanding principal balances, typically considered impaired by banks, other lending institutions and sometimes utility companies. From an accounting perspective, cash collections include an amortisation cost, commensurate with the cost of acquisition. The amount charged however, may depend on the portfolio s carrying value methodology. Credit Corp (CCP, Positive) and Collection House (CLH, Neutral) adopt the amortised cost method, which results in a straight line charge that is generally predictable through time. PNC however, adopts a fair value approach which results in movements in fair value of the PDPs recognised through the P&L. This is also influenced by PNC s cautious approach which incorporates an economic discount on new purchases of 9%. As a consequence, PNC s amortisation charge is the product of principal recovered and movements in the fair value of its portfolios. The expense charge is referred to as the change in value (CIV) charge. Overall PNC s approach results in a relatively lower expense rate relative to the amortised cost method. Importantly, the Group s fair value approach is not the only driver of the relatively lower charge, with the rate also influenced by PNC s longer liquidation profile. This is the product of a portfolio which consists mainly of bank related debt and avoids utility bills, which have more rapid liquidation profiles. With regard to 1H17, the expense rate of 22.5% and was broadly consistent with the overall expense rate for FY16 of 21.7%. With the Group expecting a similar expense rate for FY17, the valuation approach will not be a key driver of the change in profit for FY17 vs FY16. In our view, this should reduce the focus on the Group s fair value methodology, which has been an issue for investors at times. PNC CIV Expense Rate / Gross Revenue Source: Company Data 35% 25% 20% 15% 10% 5% 0% 1H14 2H14 1H15 2H15 1H16 2H16 1H17 PNC Balance Sheet Gearing Source: Company Data PNC have modestly upgraded FY17 purchases to at least $53m from at least $50m. In our view investors should not expect a material boost in purchases beyond this level given the Group s balance sheet gearing at 53% (covenant 55%). EAP forecasts a similar level of purchases in FY18 as FY17. 60% 50% 40% 20% 10% 0% Balance Sheet Gearing Covenant H17 Rushil Paiva rpaiva@eandp.com.au PAGE 2 OF 5

3 FINANCIAL SUMMARY Pioneer Credit PNC As at: 27/02/2017 Recommendation: Positive Share Price $2.07 Year end June 2016A 2017E 2018E 2019E INCOME STATEMENT Sales Revenue $m Consolidated EBITDA $m D&A $m Consolidated EBIT $m Net Interest $m Tax Expense $m Associates/Minorities $m Adj NPAT $m NRIs $m Reported NPAT $m Shares on Issue (end period) m EFPOWA m EPS DPS Franking % 100% 100% 100% 100% GROWTH/PROFITABILITY RATIOS Sales Growth % 23.5% 15.9% 39.1% 19.3% EBITDA Growth % 33.2% 16.5% 35.1% 14.3% EBIT Growth % 33.8% 16.3% 35.7% 13.8% EPS Growth % 21.2% 10.9% 27.9% 10.1% EBITDA/Sales % 36.6% 36.8% 35.7% 34.2% EBIT/Sales % 34.1% 34.2% 33.4% 31.8% EBIT Interest Cover x (6.8) (5.6) (4.7) (4.3) Tax Rate % 30.8% 29.5% 29.5% 29.5% ROE % 14.5% 15.3% 17.7% 17.7% ROFE % 14.4% 12.6% 14.4% 14.8% CASH FLOW EBITDA $m Change in Working Capital $m Other $m Gross Operating Cash Flow $m Net Interest Paid $m (2) (3) (6) (7) Tax Paid $m (5) (5) (6) (7) Net Operating Cash Flow $m Maintenance Capex $m 0 (1) (2) (2) Free Cash Flow $m Dividends Paid $m (5) (5) (6) (7) Expansionary Capex $m (42) (54) (53) (52) Acquisitions $m Asset Sales $m Dividends Received $m Shares Issues/Buybacks $m Other $m Increase in Net Cash/(Debt) $m (17) (30) (19) (11) GOCF/EBITDA % 101% 101% 102% 101% Total Capex/Sales % 88.5% 100.9% 71.6% 59.3% Total Capex/Depreciation x (35.7) (39.3) (30.6) (24.8) Source: Company data, E&P Research estimates Year end June 2016A 2017E 2018E 2019E VALUATION METRICS PER x P/EG (2YR) x Dividend Yield % 4.7% 5.1% 6.5% 7.5% EV/EBITDA x EV/EBIT x P/FCF x P/BV x BALANCE SHEET Assets Cash $m Working Capital $m PP&E $m Intangibles $m Investments $m Other $m Total Assets $m Liabilities Debt $m Working Capital $m Other $m Total Liabilities $m Equity $m Capital Employed $m Net Debt/(Cash) $m Net Debt/Equity % 75% 110% 122% 122% Net Debt/Debt+Equity % 42.8% 52.4% 54.9% 54.9% Net Debt/EBITDA x Working Capital/Sales % 96% 114% 98% 92% D&A/PP&E % (28.8%) (34.6%) (43.8%) (53.3%) DCF VALUATION $m $/share Risk Free Rate 5.5% Enterprise Value 167 $3.33 Market Risk Premium 5.7% (Net Debt)/Cash (31) ($0.61) Beta 1.20 Franking Credits $0.42 WACC 9.2% DCF Valuation $3.14 DIVISIONAL SUMMARY Group Revenue $m % Margin Trends 21% Return Trends 58% Gearing & Interest Cover % 18% 54% % 15% 50% % 12% 46% % 9% 42% % 38% % 3% 34% -8.6 EBITDA/Sales EBIT/Sales ROE ROA ROFE - Reported Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x) Source: Company data, E&P Research estimates Rushil Paiva rpaiva@eandp.com.au PAGE 3 OF 5

4 Positive Neutral Negative Speculative Buy Suspended Not Rated Stock is expected to outperform the S&P/ASX 200 over the coming 24 months Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Stock has limited history from which to derive a fundamental investment view or its prospects are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc. Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans & Partners policies in circumstances where Evans & Partners is acting in an advisory capacity. Stock is not included in our investment research universe. Research Criteria Definitions Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Earnings Outlook Earnings Momentum Shareholder Returns Debt Servicing Capacity Cyclical Risk Industry Quality Financial Transparency Composite of Rolling 12 month prospective multiples and discounted cash flow (DCF), or DCF for resource stocks. Forecast 2 year EPS growth. Percentage change in the current consensus EPS estimate for the stock (rolling 1 year forward basis) over the consensus EPS estimate for the stock 3 months ago. Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in ROE over 2 years. Rolling 12 month EBIT Interest Cover ratio. Qualitative assessment of the 2 year outlook for a stock/industry s profit cycle. Qualitative assessment of an industry s growth/returns potential and company specific management capability. If we don t understand it, we won t recommend it. For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used. Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate. Rushil Paiva rpaiva@eandp.com.au PAGE 4 OF 5

5 This document is provided by Evans and Partners ABN , holder of AFSL Please refer to the document entitled Research Conflicts of Interest Disclosure available for download from the Important Disclosures section of our website at ( The information is general advice only and does not take into consideration an investor s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor s objectives, financial situation and needs. If the advice relates to a financial product that is the subject of a Product Disclosure Statement (e.g. unlisted managed funds) investors should obtain the PDS and consider it before making any decision about whether to acquire the product. The material contained in this document is for information purposes only and does not constitute an offer, solicitation or recommendation with respect to the purchase or sale of securities. It should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors should be aware that past performance is not an infallible indicator of future performance and future returns are not guaranteed. Any opinions and/or recommendations expressed in this material are subject to change without notice and Evans and Partners is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Evans and Partners. Evans and Partners and its respective officers and associates may have an interest in the securities or derivatives of any entities referred to in this material. Evans and Partners does, and seeks to do, business with companies that are the subject of its research reports. Company AUI CIE DUI IDR IGL ING NAB QIP RWC SWM TOX CBA Nature of Relationship The Issuer has appointed Evans and Partners as Broker to an on-market buy-back. Accordingly, Evans and Partners is unable to give Sellers advice in respect to a sale of this security. The Issuer has appointed Evans and Partners as Broker to an on-market buy-back. Accordingly, Evans and Partners is unable to give Sellers advice in respect to a sale of this security. Evans and Partners has been appointed as Co-Manager to the institutional placement and accelerated non-renounceable entitlement offer and will receive fees for acting in this capacity. A director of Evans and Partners Pty Ltd is a director of Seven West Media Limited. I, Simon Fitzgerald, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject investment theme and/or company securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Rushil Paiva, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject investment theme and/or company securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Simon Fitzgerald, and/or entities in which I have a pecuniary interest, have an exposure to the following securities and/or managed products: N/A I, Rushil Paiva, and/or entities in which I have a pecuniary interest, have an exposure to the following securities and/or managed products: ACX, DRM, UBN, QMS, OFX, BYR, AOH, NAB Except for any liability which cannot be excluded, Evans & Partners, its directors, employees & agents accept no liability or responsibility whatsoever for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. All information is correct at the time of publication; additional information may be available upon request. Rushil Paiva rpaiva@eandp.com.au PAGE 5 OF 5